New York Federal Reserve Chairman John Williams said on Tuesday he expects the US economy to avoid a recession, although he sees the need for significantly higher interest rates to control inflation.
“Recession is not my base case right now,” Williams told CNBC’s Steve Liesman during a live interview with Squawk Box. “I think the economy is strong. Financial conditions have clearly tightened and I expect growth to be quite slow this year compared to last year.”
To quantify that, he said he could see gross domestic product gains for the year being reduced to around 1% to 1.5%, a far cry from 5.7% in 2021, which was the fastest pace since 1984 represented.
“But this isn’t a recession,” Williams noted. “It’s a slowdown that we need to see in the economy to really ease the inflationary pressures that we have and bring inflation down.”
The most-watched indicator of inflation shows prices rising 8.6% year-on-year in May, the highest since 1981. A measure the Fed prefers is lower, but still well above the Fed’s target Central Bank of 2%.
“Far from where we need to be”
In response, the Fed has decided to raise interest rates three times this year by a total of around 1.5 percentage points. Recent projections from the rate-setting Federal Open Market Committee suggest more are on the way.
Williams said it’s likely the federal funds rate, which banks charge each other for overnight lending but sets a benchmark for many consumer debt securities, to 3% to 3% from its current target range of 1.5% to 1.75% .5% could rise.
He said “we’re a long way from where we need to be” on the rates.
“My own baseline view is that next year we have to move into a bit of a restrictive zone given high inflation, the need to bring inflation down and really hit our targets,” Williams said. “But that forecast is in about a year. Of course we have to be data dependent.”
Some data points have pointed to a sharply slowing growth picture of late.
With inflation at its highest level since the Regan administration, consumer sentiment is at record lows and inflation expectations are rising. Recent manufacturing surveys from regional Fed offices suggest activity is slowing in several areas. The jobs picture was the main bright spot for the economy, although weekly jobless claims ticked slightly higher.
An Atlanta Fed gauge that tracks real-time GDP data is pointing to a growth rate of just 0.3% for the second quarter after a 1.5% decline in the first quarter.
Williams acknowledged that “we’re going to have slower growth this year, but we’ll still have growth.”
In addition to raising interest rates, the Fed has started to trim some assets on its balance sheet – notably government bonds and mortgage-backed securities. The New York Fed is in the early stages of a program that will eventually result in the central bank rolling off as much as $95 billion in proceeds from maturing bonds each month.
“I don’t see any signs of a taper tantrum. The markets are doing well,” Williams said.
A St. Louis Fed indicator of market stress is hovering around record lows in data dating back to 1993.